The envelope method (typically recommended by Dave Ramsey) is an easy way to budget and keep track of your spending. Its chief advantage is that it’s crystal clear whether or not you’ve got money available to spend. After all, all you’ve got to do is take a look in your envelopes. It also forces you to think about your planned spending for the month ahead of time — which is pretty much the definition of a budget.
How the envelope system works
The envelope method works like this. You decide ahead of time how much cash you want to set aside for each category, and how often you want to replenish the envelopes. (For example, if you get paid twice a month, you might break your monthly spending for each category into two, and place half the total amount in the appropriate envelopes each time you get paid.) Categories might include things like groceries, haircuts, entertainment, eating out, gas, etc. — whatever you normally spending day-to-day. You fill up the envelopes with cash when you get paid, and spend from the envelopes.
If you don’t have enough money left in an envelope to buy the thing you want to buy, you have two choices. You can either stop spending or transfer money from one of the other envelopes. Just be sure you don’t “rob” an envelope from a category that you’ll really, really need to spend in. (Such as groceries or gas.)
While you can always use plain old envelopes from the office supply store to set up your envelope system, and while there are special envelope system products available online, it can be fun to create your own using pretty 8 1/2 x 11 craft papers.